Sourcing Valuable Investments
- Understanding a Deal: Deals involve financial transactions between firms for minority/majority shares. Common deal types include mergers, acquisitions, and IPOs (e.g., Heinz and Kraft merger, Disney's Marvel acquisition, and Alibaba's IPO).
- Criteria for a Good Deal: Factors determining a good deal include profitability, feasibility, balance of interests, and consideration of market tailwinds/headwinds.
- Deal Origination: The method used by financial institutions to find lucrative investment opportunities in the market. It differs based on the firm's size and focus, ranging from less active sourcing for large firms to more aggressive pitching for smaller firms.
- Sourcing Methods: Includes websites, mailing lists, networking, and platforms like Sourcescrub, Grata, and Acquire.com. Firms’ websites are critical, often showcasing firm activities, services, and firm mission.
- Deal Process: The step-by-step flow of a deal includes: Teaser (initial advertisement of investment opportunities), CIM (Confidential Information Memorandum detailing key business aspects), IOI (Indication of Interest indicating buyer's interest), MP (Management Presentation summarizing current and future performance), IC (Investment Committee consultation), and LOI & PSA (Letter of Intent and Purchase Agreement outlining purchase specifics).
- Mock Deal Illustration: The mock deal between Firm A and Firm B demonstrated how a deal is originated, negotiated, and finalized, involving an investment bank as an intermediary.
How to Determine the Quality of a Business
- 1. Understanding Business Quality:
- Business quality assessment is holistic and covers financial health, market position, competitive advantage, the management team, and factors influencing long-term success.
- In contrast, due diligence is similar to auditing, focusing on verifying the financials and assessing investment risks and opportunities.
- 2. Qualitative Analysis:
- Executive Team: Quality of leadership greatly impacts business success. Example of good leadership is Jamie Dimon (J.P. Morgan).
- Competitive Advantage: Differentiation from competitors can lead to increased market share, profitability, and long-term success. Example: Disney's unique character cast.
- Customer Relationship Management (CRM): Tailoring services to loyal customers enhances their experience and satisfaction. Example: Patagonia's sustainability practices.
- Supplier Relationship Management (SRM): Ensuring high-quality goods and services from suppliers improves supply chain efficiency and customer satisfaction.
- R&D: Investment in research and development can lead to innovative products and services.
- Industry: Factors such as competitor concentration, projected growth, barriers to entry, and industry demographics influence business quality.
- 3. Quantitative Analysis:
- Revenue, Net Income, Gross/Operating Margins: These financial indicators reflect the company's growth in sales, cash inflow, and profitability.
- EBIT/Operating Income & EBITDA: These standardize earnings reporting, allowing cross-industry comparison.
- Debt Management: A healthy debt-to-equity ratio and decreasing accounts payable and long-term debt indicate good debt management.
- Free Cash Flow (FCF): FCF measures a company's ability to generate cash after accounting for capital expenditures, indicating financial flexibility and growth investment capacity.